3 Ways to Get Your Life Back

How’s your workload these days?

If the pandemic has forced you back into the weeds of your business, you’re not alone. Many owners are again doing tasks they haven’t done in years because they have had to lay off front-line staff or their employees have fallen ill or are caring for someone in need.

Being back in the middle of things is neither healthy for you nor your business long term. Personally, it’s a recipe for burnout, and professionally, your business will be less valuable with you doing all the work.

Now is an excellent opportunity to retool your company so that it can start running without you again. These three steps should help:

Step 1: Sell less stuff to more people.

Most companies become too dependent on their owner because they offer too many products and services. With such a full breadth of offerings, it’s hard to find and train employees that can deliver. The secret is to pick something that makes you unique and focus on finding more customers, not more things to sell.

Take Gabriela Isturiz as an example. She cofounded Bellefield Systems, a company offering a timekeeping application for lawyers. Over the next seven years, Bellefield grew to 45 employees. Although many businesses bill by the hour, Isturiz focused exclusively on timekeeping for lawyers, which is one of the reasons she was able to integrate with 32 practice management platforms used by lawyers—a big reason Bellefield’s product was so sticky. It worked out well for Isturiz as she was growing 50% a year with EBITDA margins of more than 25% when she sold her company in 2019.

Step 2: Systemize it.

Next, focus on creating systems and procedures for employees to follow. For example, Nashville-based Bryan Clayton built Peachtree, a landscaping business. Most lawn care companies are mom-and-pop operations, but Clayton built Peachtree up to 150 employees before he sold it to LUSA for a seven-figure windfall.

What made Peachtree so unique? Clayton focused on documenting his processes. For example, one of his customers was a McDonald’s franchisee who owned 40 locations. He was frustrated by how many people discarded cigarette butts in his drive-through, so Clayton offered to clear the debris from the lanes as part of his lawn care process. He then trained his employees on the drive-through clean-up process he had created so it was followed across all 40 of the customer’s locations.

Step 3: Outsource it.

Next, consider outsourcing what you’re not very good at. For example, David Lekach started Dream Water, a natural sleep aid bottled in a five-ounce shot similar to the famous 5-Hour Energy Drink.

Lekach built Dream Water to almost $10 million in annual revenue before selling it to Harvest One, a cannabis company, for $34.5 million in cash and Harvest One stock. Lekach saw his role as “selling Dream Water, not making it.” That meant he outsourced the manufacturing, packaging, and distribution of Dream Water to a co-packer, ensuring Lekach and his team could focus on selling Dream Water.

It’s natural for a leader to step in during a crisis, but that’s not sustainable for the long term. Pull yourself out of the doing, and you’ll build a valuable company for the long term that’s a lot less stressful to run along the way.

 

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2nd Quarter Business Transactions Activity Report

The following information has been provided by BizBuySell.com –the largest business for sale marketplace online, receiving over a million visitors a month.  Each quarter, BizBuySell analyzes business transaction data from its website and provides summary information to the business broker community.  The BizBuySell Insight report focuses on the data available for 70 of the major US markets.

Here are a few highlights of the most recent report, pertaining to transaction and business for sale listings in the Dallas/Fort Worth Metro area, which includes a total of twelve counties.

  • 62 Business transactions reported in 2Q 2020 – a 22.5% decline in the number of transactions reported in 1Q 2020, and a 46% decline from 2Q 2019.
  • However, the financial data for the 2Q 2020 transactions showed a marked increase over 1Q 2020 – the median sales price for businesses sold in 2Q 2020 increased by 14% over 1Q, as well as the same 14% increase in price over 2Q 2019
  • Additionally, the average pricing multiple realized in 2Q 2020 was the highest multiple noted in a given quarter since 1Q 2017!
  • The median revenue reported for transactions in Q2 2020 was the highest average number reported in the last 4 years, as was the median cash flow for those same transactions.
  • When comparing this data for the same time period for all VR Business Broker offices across the country, we see a similar trend. Fewer transactions, but statistically stronger businesses being sold during the 2Q 2020.

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Exit Strategy Options

There are a variety of options when it comes to an exit strategy, depending on the size of your business and your desires regarding future participation in the business. Please see below a quick summary of the benefits of the more common options that one may wish to consider.

1. Merging with another company

a) The merged company should be able to benefit from economies of scale between the two organizations that would result in greater profitability.
b) This is an ideal way to quickly capture much greater market share.
c) Merging with another company may also provide a way to diversify offerings.
d) A merger may be a way to bring complimentary skills together making for a stronger overall employee base.

2. Strategic Acquisition by another company

a) This may the best way for a seller to fully exit business in the event the company is too large for the average individual buyer.
b) May offer employees additional opportunity for growth.
c) This approach may offer the seller a future opportunity to stay on with the company after having cashed out from the sale. Perhaps the Seller wants to reduce the burden of ownership but isn’t ready to fully exit the business.
d) There may be tax advantages when it comes to stock exchanges.

3. Private Equity

a) This option often offers sellers the best of both worlds – take “chips off the table” and also have future upside earnings if only selling a percentage of the business.
b) Capital can be provided for growth plans.
c) The Seller’s Management team may be an integral part of the future of the company.
d) Most private equity firms have specific criteria for the size of companies they desire to acquire.

4. Outright Sale to 3rd Party individual

a) This may be the best viable option depending on the size of your company.
b) This option typically provides the Seller with the cleanest and quickest “exit” from the business.

VR Business Brokers will be happy to meet with you and discuss these various options to help you assess the most viable for your circumstances.


Investors’ Decision Making Process & Why You Should Know it Before Going to Market

Source: ErmanCivici/iStock

While much has been written about what persuades investors to buy stakes in businesses, a lot of the discussion revolves around the investors’ decision process in relation to assessing seed or start-up investment opportunities. Advice is often targeted at “the pitch”, the qualities of the founder/s, etc. However, in the market for mature and, ahem, “post-revenue” businesses — and contrary to Silicon Valley thinking, established businesses making a profit do exist — criteria, decisions and funding work by slightly different rules.

Early Stage vs the Rest of the World

Early stage opportunities involve high risk, high cash-burn businesses. Investors who take equity or quasi-equity in these businesses expect most of these ventures to tank and a small fraction to become so enormously successful that they more than compensate for losses elsewhere. A VC would expect to get a higher return on money invested in (risky) early stage businesses than he’d get in safer, more liquid markets. But his ROI expectation is a fund-level expectation (i.e., it’s the overall return expected from his whole portfolio of investment). He does not expect that level of return for each and every business in the portfolio.

However, the much larger mergers & acquisitions (M&A) market marches to a different beat. It’s composed of trade and institutional investors, private equity firms, family offices and others, and they are looking for businesses with demonstrated viability, positive cash flow and a loyal customer base. Essentially, they want established and proven businesses. Every business “acquired” has to be a business which can be sold later for a higher price, usually after creating value by driving growth and/or reducing inefficiencies. The same logic applies in mergers — the merger makes sense when the merged entity is more than the sum of its component parts, meaning value has been created.

Risk vs Return

Acquisitory investors like private equity firms judge businesses differently to how VCs do. They are looking for a pre-determined level of return for a given level of risk. In other words, they have a wider range of potential acquisition targets — if the risk-reward ratio matches or exceeds their threshold, they’ll take a peek.

This is a key difference. In M&A deals, unlike with VC, considerable power to alter the risk-reward ratio rests with the business owner seeking investment.

Illustration: Acme Ltd. has an enterprise value of $5M. Acquirer PLC studies the business and forms an opinion that it will be cash generative over coming years to the tune of $400,000 per annum (8% of the asking price). Acquirer PLC also quantifies the risk of meeting those earning targets. They decide that the return doesn’t compensate them enough for the risk.

Acme Ltd. has two options to close a transaction — lower the price or lower the risk. Reducing the price of the business to $4M leaves the cash flow of $400,000 translating to a return of 10%. The higher rate just might be acceptable to this investor.

Alternatively, Acme Ltd. can reduce the risk PLC perceives in the business. Vendors may underwrite select liabilities, extend warranties and indemnities to the investor, or even accept part of their compensation being contingent on future performance. In doing so they change the risk profile of the business. In our case, the acquirer may be then willing to accept a lower rate of return — 8% — because they are also taking on less risk.

Understanding the Mindset of the People with the Money

Different players in the M&A market have different motivations, criteria and yardsticks on which they assess potential targets. Knowing the players and what drives their decisions is essential to succeeding in getting acquired, and getting acquired at the right price. To provide a couple of examples…

The Trade Investor

A trade investor is guided by his company’s strategic plans and the context his board has set out for potential acquisitions. This will include a framework for evaluating acquisition targets including, for example, specifications on sector, technologies, skills or intellectual property. They often attempt to make part payment in shares.

It is difficult to know each acquisitory company’s individual preferences, but to the extent the vendor can demonstrate the whole being greater than the sum of two parts, he’s on the right track. These buyers are not so keen on the business continuing to grow as it has in the past, but are more interested in accretion — how the integration of the target will aid their own growth. They see change. They worry about how that change will impact both operations. They are interested in back-office infrastructure, what functions they can eliminate and what cost savings they can extract.

They may be elements of a target that are not of strategic importance to these investors. It’s important to establish early into the dialogue as much as possible about their intentions, strategy and goals. This is to the vendor’s advantage. It allows him to focus on promoting to the acquirer those elements of his business that offer the synergies they’re seeking.

Even within individual acquirers, there will be competing interests. The CFO may be concerned about valuation multiples, ROI and current debt, and may not like the factoring company being used. The CTO may see hurdles in integration of IT systems — he never did the CRM software you’re using. Internal politics may have others align themselves against any acquisition if they perceive the status quo as a safer option for them as individuals. A good intermediary assisting with placing a business will be as much a politician and psychologist as a salesman.

The Financial Investor

These come in many shapes and sizes. They are not looking to merge operations so they evaluate targets as a stand-alone entities.

They may be financing a management buy-out (MBO) or they may be providing growth finance via a partial or complete equity transfer, but the intention is to facilitate the company’s growth. After this, they cash out by selling the business (or their stake) in about four to six years. Post-finance, the target company continues to operate independently with the same management team and with little personnel change except for new board appointees by the investor.

The prospect of the company delivering high growth in the near future is key to landing these deals. Continuity and growth are the themes, not change. As these investors are likely not familiar with the target’s industry it’s worth the vendor focusing more on explaining the industry, the competition, the business’ place within the ecosystem.

Conclusion

The importance of knowing the buyer, and what the buyer is really after, cannot be overemphasized. The approach best likely to result in success is the one targeted to what each specific acquirer is actively seeking.


Written by Clinton Lee

Clinton is the founder of The Exit Firm, a UK M&A consultancy that advises business owners on their exit options and connects them with the right professional expertise to help them achieve their exit goals.

Prior to starting this consultancy, Clinton’s entrepreneurial career spanned over three decades and included building, buying and selling of over two dozen businesses.

Now based in the UK, Clinton originally studied accountancy in India as an undergraduate and attended Virginia Tech in the USA for an MBA in finance.

Areas of Expertise: UK-based private companies with turnover of up to £10M.

 

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8 Steps For Turning A Service Into A Product

Does your business offer a service or a product that you differentiate through a higher level of service?

If so, you’re probably disproportionately impacted by the economic disruption caused by the coronavirus pandemic. Consumers are cutting back on services to avoid human contact and conserve cash, but we are still buying products that solve a specific problem.

Businesses are buying products like Zoom, and Slack for teleconferencing and consumers are dropping services in favour of products. Italy was the first western democracy to experience the brunt of the coronavirus pandemic, and it changed everything about daily life, right down to what people bought from Amazon. For example, in the week after the Italian government quarantined most of its citizens, there was a 236% increase in Italians buying sports gear, presumably to set up a home-based exercise routine instead of services like personal training.

Instead of going out to enjoy the service at a great restaurant, we’re buying more alcohol. According to a recent Nielsen survey, overall sales of spirits like tequila and vodka were up 75% from the same period last year.

Service Providers Are Pivoting to Provide A Product

Many businesses have reacted by turning their services into what appears to consumers as a tangible product:

  • Los Angels-based Guerrilla Tacos typically serves up a lively dining experience and has recently pivoted to offering a product called their “Emergency Taco Kit,” a take-out survival kit for the taco lover.
  • Spiffy, a US-based mobile car wash service, has switched to offering its COVID-19 “Disinfect & Protect” product.
  • K.-based Encore has pivoted from a talent booking service to offering their “Personalised Music Message” product, which enables you to commission an artist to create a customized video greeting for a loved one.

To take advantage of our gravitation towards buying products, service providers can take the following eight steps:

Step 1: Niche Down

The first step is to narrow your focus to a single type of customer. Many people feel uncomfortable with this stage – in particular in times like these when you need more customers, not less. It’s counterintuitive, but the first critical move in turning your service into a product is niching down because services can be adapted and customized for a variety of customers. In contrast, products need to fit one type of buyer.

Picking one niche also helps you design a great product and efficiently reach potential customers through things like Facebook groups set up to serve a specific target.

Niche down further than you’re comfortable, then niche down some more. Consider:

  • Demographics: (age, gender, income)
  • Firmographics (company size, industry)
  • Life stage (just married, retirement)
  • Company life stage (start-up, mature etc.)
  • Psychographics

Step 2: TVR-Rank Your Services 

Once you’ve niched down more than feels comfortable, the next step in turning your service into a product is to identify the services you offer, which are Teachable to employees, Valuable to your customers who have a Recurring need for it. At The Value Builder System™, we call this finding your “TVR.”

Grab a whiteboard or blank piece of paper and make a list of all the services you offer the niche you picked in step 1. Then score each service on a scale of 1 to 10 on the degree to which you can teach employees to offer the service, how valuable it is to your niche and how frequently they need to buy it.

Pick the service that scores the highest and move to Step 3 (you can always come back to this step if you want to consider multiple products).

Step 3: Get Clear on Your Quarter Inch Hole

Harvard Professor Theodore Levitt was famous for saying, “people don’t want to buy a quarter-inch drill. They want a quarter-inch hole.” Be clear about what problem your product solves for your niche. For example, “The Emergency Taco Kit” makes cooking at home fun for quarantined Angelinos, while the “Disinfect & Protect” product sanitizes cars for essential service providers who need to keep driving.

Step 4: Brand It

With a service, you’re typically hiring a person. Still, with a product, you’re selling a thing. Unlike people who have names, something like the “Emergency Taco Kit,” “Disinfect & Protect” and the “Personalised Music Message” have brands.

Step 5: List Your Ingredients

Service businesses customize their deliverables in a unique proposal for every prospect, but product companies list their ingredients. Pick up any package at a grocery store — whether it’s a bottle of dishwasher detergent or a box of cereal — and you’ll see an itemized list of what’s inside the box, which is why your offering needs to list what customers get when they buy.

Step 6: Pre-Empt Objections

When selling a service, you have the luxury of hearing your prospect’s objections first-hand, and you can dynamically address them on-the-spot. When selling a product, you don’t have the benefit of a person to overcome objections, so consider what potential objections customers might have and pre-empt them. When selling the “Disinfect & Protect” car cleaning product, Spiffy anticipated the four most common concerns customers raise and pre-empts each in their marketing material. For example, Spiffy assures prospects that they have:

  • A money-back guarantee for people who aren’t sure
  • Insurance in case they damage your car
  • Trained technicians who know what they are doing
  • Environmentally friendly cleaning products so they don’t damage the environment

Step 7: Price It

Services are quoted by the hour, day or project and usually come at the end of a custom proposal. Products publish their price.

Step 8: Manufacture Scarcity

One of the benefits of a service business is that you always have sales leverage because your time is scarce. You can’t make more hours in the day, so customers know they need to act to get some of your time.

With product businesses, you need to give people a reason to act today rather than tomorrow. This means you need to manufacture a reason to act through things like limited time offers, limited access products etc.

Service providers have been walloped, but if you make your service look and feel more like a product, you may be able to take advantage of our society’s flight to tangible products in uncertain times.

 

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Corp Dev and COVID: What 3 Deal Pipelines Look Like Now

Written by Meghan Daniels Axial | May 11, 2020

The COVID-19 pandemic has thrown a wrench in business plans and deal prospects for firms around the world. We talked to corporate development professionals at three active strategic acquirers (and Axial members) to get a sense of how COVID has impacted their business, their pipeline, and their future plans.

National Express

Isaac Lund, VP Corporate Development and M&A 

About the company: North American wholly owned subsidiary of publicly owned UK transportation company. Operates school buses in the U.S. and Canada as well as adult transportation vehicles.

Acquisition focus: Historically school buses/school bus businesses, recently shifted to adult transportation. Done 30 deals in the past 5 years, deployed a total of $750 million in capital. 

NAES Corporation

Craig Rodwogin, Director of Strategic Planning      

About the company: Industrial services company, focused on power plant operations and construction. Largest independent operator of power plants in the United States.

Acquisition focus: 7 deals in the past five years. Looking for deals from $5-$250 million in revenue. Looking for adjacencies to traditional power (renewables, oil and gas, etc) on the power operations side and services like environmental consulting or other regulatory expertise on the engineering side. Also looking to expand industrial construction expertise in key services and geographies.

Winsupply

Monte Salsman, President of Winsupply Acquisitions Group 

About the company: Wholesale distribution company: plumbing, electrical, HVAC, waterworks, fire, fabrication, pipe valve and fitting, irrigation and pumps. Has over 600 local companies in network, incorporated as C corporations

Acquisition focus: Buys distribution companies in the above verticals, has over 600 local companies. Looks at deals of almost any size, though most firms are under $100 million in revenue. Offers owners a 60-40 split — Winsupply is the 60% equity owner and the local team can own up to 40% of the business.

How has COVID-19 impacted your business?

National Express:

We’re in a holding pattern right now. We’ve been really heavily impacted by what’s happened. Obviously, no schools are in session so almost all our buses are idle, though we are helping where we can. For example, we are using school buses to distribute food to food-insecure children in the school districts we serve and utilizing motor coaches to assist FEMA with various transportation needs. On the adult transport side, no one is doing tours or charters and universities are out of session as well. We continue to operate our fixed and paratransit routes, though volumes are down 50-75%, depending on the market.

NAES:

Running power plants is an essential service. So our field personnel are still going to work, and conducting business as usual. From a back-office perspective, we’re working remotely and focused on keeping everyone safe — that’s always been our company’s top priority.

Winsupply:

Our revenues were right at $4 billion prior to COVID. All our businesses are considered essential, so we’re down a bit overall but it’s just single digit.

How has your pipeline been impacted?

National Express:

Prior to the pandemic, we had a deal that was expected to close at the end of April; we were waiting for one perfunctory regulatory approval in order to close. We were almost completely through diligence but now we’ve put that deal on hold until at least the second half of the year.

We had two or three other deals that had traction towards an LOI and were kicking off diligence, but those have gone quiet as well.

We’ve stopped pursuing our longer-range pipeline. We don’t know when this will end, which makes it hard to get a conversation started with sellers, who are more likely than not focused on keeping their business going. We’re waiting to see how things play out — if we’re able to recover fairly quickly, I think we’ll become an active buyer again, but that all depends how much cash we have to deploy as a buyer vs. taking care of other business needs.

We’re looking for potential bright markers on the horizon. Things like school going back to in-school learning in the fall and a re-opening of the economy, even if only partial, will hopefully allow our business to recover. The quicker we recover, the more likely it is that we can start looking at re-activating our pipeline.

NAES:

Because our business and the businesses we’re looking at are essential, we haven’t seen the significant delays that other businesses might be seeing. We do see minor delays because many companies are focusing on their business and their people rather than on contract negotiations.

Most of our pipeline was late-stage. We’re letting the dust settle and then we’ll get back to work. There is a bit of concern about what the industry will look like in six months or even a couple of years. But we’re not slowing down — at the end of the day we’re a long-term strategic investor and we’re in this for the long haul.

For our deals that were in progress, we’re anticipating a month or two delay. The challenges for these deals will be how to integrate the businesses when you can’t get onsite and work face to face.

In terms of replenishing the pipeline, we’re still prospectively looking, though it’s tough to do some of the traditional business development activities and build a pipeline if you’re not on the road. I’ve seen my deal flow slow down across the board, but we’re still pressing ahead.

Winsupply: 

Our pipeline was very full: We had north of 20 deals we were evaluating, and had already closed three this year. We were in the late stages with a company called May Supply when the world more or less fell apart on March 13. We had already finished diligence and on March 16 we made the decision to go ahead with the acquisition, which we finalized on April 10.

At that point, we were also pretty deep into financial analysis with 10 other companies, and I called everyone and told them we had to tap the brakes for now. Like most companies, we have to protect our core, because we have no idea what the future will look like. I suspect once we have a better sense of what things look like — maybe in the second quarter or so — we’ll begin to evaluate when to restart those deals.

One thing I’m not doing right now is calling new people. It just feels wrong to be reaching out to people when they’re focusing on their businesses, potentially laying people off, and battling this crisis.

How has your focus shifted given the pause in deals?

National Express:

I’m helping out in other aspects of the organization. I have a finance background so am working on varying projects, including assisting with accounts receivables issues, developing valuation models for some items on our balance sheet related to prior deals, assisting our business development team to develop a playbook, similar to the one we have for acquisitions, they can use as they work the process of bidding on new work and working on a cross functional team tasked to transform the branding for our adult transportation business.

Winsupply:

We’re working on improving our database, developing some marketing messaging, tightening up long-term strategic planning, and also putting some structure around how we price deals going forward. How do we find the intersection between what’s an appropriate price based upon an unknowable future revenue? We want to offer a fair price to a person who has spent a lifetime building a business. But historically pricing has been based upon a backwards looking number, and that feels very risky given the current situation. So we’re trying to figure out how we’ll modify sellers’ expectations of their businesses’ worth and have some more flexibility about basing some of that price on a future earning stream.

 

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3 Ways To Re-Invent Yourself In A Crisis

Veterans refer to “the fog of war” to describe how difficult decision making can be when you’re on the battlefield with imperfect information.

Sometimes the obvious answer in retrospect is not so apparent when you’re in the throes of a crisis which is why we wanted to share the stories of three owners who took bold and decisive action at a time of deep economic uncertainty.

Back in September 11, 2001…

During the days that followed the terrorist attacks of September 11, 2001, most Americans believed they were at war. The crisis paralyzed owners who wondered what would become of the world. Spending stopped. The stock market tanked. At the time, Sunny Vanderbeck owned and operated a web hosting company called Data Return and had just seen a $1 billion acquisition offer from Compaq go up in smoke. Vanderbeck took stock. Data Return was burning cash, and Vanderbeck figured they had six months to get a deal done before they could face mortal danger. He continued to look for a buyer and soon received another offer from a technology consulting and software business rolling up IT services companies. Vanderbeck agreed to sell Data Return in return for stock in the IT services roll-up.

Soon after the transaction closed, Vanderbeck realized he had made a mistake. He recognized that his company’s acquirer was suffering the consequences of a buying spree, during which they had made forty recent acquisitions. Data Return’s acquirer had bitten off more than they could chew, and a little over a year later, they declared bankruptcy. Vanderbeck had fallen from being just days away from a $1 billion payday to owning shares in a bankrupt business. He still had his original Data Return partners and investors who believed in him, so Vanderbeck assembled his team again and bought the assets of his former company out of bankruptcy for $30 million. Four years later, Vanderbeck sold Data Return to Terremark Worldwide in a transaction valued at $85 million.

Listen to Sunny’s story

Back in 2003…

In 2003, the most common term used to describe the state of the economy was the “jobless recovery.” The year began with concerns about the war in Iraq. The Dow Jones Industrial Average fell below 8,000 in February. Mortgage rates plunged to 30-year lows, and homeowners rushed to refinance. George Bush cut taxes hoping consumers would start spending. It was against this backdrop that Joshua Dick took over his father’s company.

Urnex was generating less than $1 million in annual sales across seven product lines. Dick re-trenched and jettisoned six of the seven product lines to focus his limited resources on the one product that Dick thought had the potential to scale: cleaning supplies for commercial coffee makers. In other words, a niche of a niche. Dick poured all of his limited resources into becoming the best in the world at one thing and ultimately grew Urnex to more than $5 million of EBITDA, which is when he decided to sell for a double-digit multiple.

Back in 2008/9…

The Great Recession that began in 2008 was a time of massive disruption. Stock markets around the world were dropping hundreds of points a day. Banks were failing. Many, including John Moore, thought the world might be ending.

Moore is the founder of 3D4Medical.com, a company that created three-dimensional models of the human body, photographed them and licensed the images to textbook publishers. When the Great Recession of 2008/9 hit Ireland, Moore’s business took a significant turn for the worse, and he realized he needed to re-invent the company. Moore decided to offer an application that students could use to learn about anatomy. Instead of focusing exclusively on textbook publishers, they started selling their app directly to students, teachers and medical professionals. The business began to hum as more Universities – including the likes of Stanford and Cambridge – signed on. By 2019, 3D4Medical was up to 75 employees, including a reliable management team. Moore was making plans to continue to grow the business when one of the biggest textbook publishers in the world made an offer to buy 3D4 Medical for $50.6 million.

Listen to John’s story.

 

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Pros and Cons of Management Buyout

Article written by Meghan Daniels of Axial

A management buyout is exactly what it sounds like — a management team (or individual) purchasing the business they’ve been running. The management team may use personal resources or seek out outside financing to help fund the acquisition. Common sources of funding include seller financing, bank loans, or private equity.

Management buyouts (MBOs) can be a great option for a certain type of founder, management team, and company — but they aren’t for everyone. Middle Market Review talked to Gregg Delcourt, Senior Vice President at Alaris Royalty Corp, about what type of business tends to be a good fit for a management buyout and what companies should keep in mind before the transaction.

When do companies typically pursue management buyouts?

Usually the founder is looking to step back, but wants to make sure they’re passing the company on to a person or group of people they trust. Like any seller, owners interested in MBOs are looking for liquidity, but they tend to be equally if not more interested in their legacy and the impact of a potential sale on the company, employees, and surrounding community. Owners may not want to deal with a third-party sale process or take a risk in terms of change of control.

What are some of the challenges of MBOs?

Historically, most businesses were just handed down to the next generation of leadership. There wasn’t the same access to capital there is today. Obviously, we’re in a world today where capital is a lot more accessible. M&A advisors on the whole are likely to advise owners to pursue a third-party sale mandate as opposed to selling to their management team. It’s a lot easier to sell to a third-party because there’s price discovery to figure out what the business is really worth.

In an MBO, there’s always the question of whether the founder is being taken advantage of or leaving money on the table. Even the founder who really likes his management team still wants to make a good rate of return on the sale of his business, and an MBO will rarely provide a founder with the highest price.

That said, a sale to private equity or a strategic isn’t always in the best interest of the company or the people who got the founder to where he or she is today. Many of the companies we end up partnering with on MBOs have already initiated outside sales processes but haven’t been able to find a transaction the seller feels comfortable with.

We view an outside sales process as a positive event, as it allows the retiring founder to have the ability to thoroughly evaluate the landscape of potential options available to them. This can really help them come to a consensus partnering with Alaris to execute an MBO is the best option to achieve a fair market value for their business and ensure that the legacy of the business is protected by the management team that helped them build it.

What do you see as the most crucial factor for a successful management buyout?

It’s important that the founder, or current owner, of the business, be in a position where he or she is ready to leave. If the founder is still responsible for making significant decisions or maintaining key relationships, that will make the transaction much more difficult. One of the main benefits of a management buyout is the continuity of leadership before and after the sale — but that’s only a benefit if the founder has truly stepped back and helped diversify the company’s key relationships amongst their management team.

A lot of founders think of themselves as less important than they really are. They might say, “I’m only in the office 10 hours a week” — but those 10 hours may very well be the most critical hours of the business’ operations. The team is still looking for direction from them and they still own the majority of relationships.

If companies do have high levels of owner dependence, what can they do to make an MBO work?

We make sure that the founder is willing to stick around and continue to help transition the business after the sale. A lot of times that will mean there’s a stepped exit over time of equity. Some other groups may put together consulting agreements, but we find that typically doesn’t work as well — once someone has the money in their pocket, they inevitably become a lot less engaged than they are when they still own a piece of equity in the business. We prefer a path where the owner continues to own equity but the management can give liquidity to the owner over time.

Are there particular industries where you tend to see more management buyouts?

Often, you’ll see management buyouts in businesses that are more asset-heavy — these are companies where the management team can go to a traditional lender and borrow against their assets and buy out the founder that way. However, MBOs certainly aren’t limited to these businesses. Our mandate focuses on asset-light businesses; we’re looking for companies that are more service-oriented and less asset-intensive. MBOs also tend to work well for these businesses because they ensure that their customer relationships — on which they are dependent — won’t be disrupted post transaction.

What’s an example of a business Alaris recently partnered with on an MBO?

We recently partnered with Heritage Restoration, a specialty contractor based in Boston. The current CEO had been with the company for 14 years, and during that time the founder had slowly transitioned out. He was ready to sell the business. He first went out to market to see if he could find an outside buyer, but then they came across the Alaris Preferred MBO structure and realized it might be a good fit. We were able to help the CEO fund the acquisition of the business from the founder through our preferred equity investment. The CEO ended up owning all the equity as the founder shares were retired.

In general, Alaris’ model is different from that of a typical private equity firm, which has to provide liquidity back to their LPs. We’re a public company, so our capital is effectively evergreen. We take a preferred equity distribution. We don’t have a time horizon — we’re in it for as long as the new owners want us as partners.

When the Alaris Preferred MBO is said and done, the management team owns 100% of the company. The day after close, our goal is to see the business continue to operate just like it did the day before. We’re not there to tell them when to spend a dollar and when not to spend a dollar, but we can provide guidance or counsel with regard to strategy, acquisitions, and other key decisions in the business.

 

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5 Ways to Earn Maximum Value When You Sell Your Business

Article written by Michael Richmond of The DAK Group and provided courtesy of Axial.net

Smart business owners think proactively about how they can get a premium valuation for their business. This mindset is critical when the time comes to sell your business. You will need to be able to articulate the main value drivers of your business to potential buyers and paint the picture of what the future can be.

Prior to committing or launching a sale process, these steps can help you prepare your business and communication strategy to ensure success.

1. Understand what makes your business unique

The unique aspects of your business are the value drivers that buyers will use to determine the amount they are willing to pay.

For example, does your business possess highly differentiated products or services as compared to competitors? Do you have high market penetration in geographies or markets that are difficult to enter? Does your company possess IP or technology that act as a barrier to entry for the competition? Use these value drivers as the foundation of your marketing communication strategy to help crystallize why a buyer would be interested in your company.

For example, a wholesale hardware products distributor might have differentiated themselves from  competitors by using a consultative sales approach and bundling their products with tailored problem-solving solutions for customers. By providing this service to customers, the distributor was able to generate significantly higher margins than their competitors. In addition, they had developed a strong e-commerce distribution platform to attract another market segment.

The combination of these value drivers —  dual-distribution channels and industry leading margins — enabled the business to be positioned for an outlier valuation.

2. Address key business risks

While it is important to identify value drivers, it is equally as important to clarify risks prior to proceeding with a sale. Here are three common examples:

  • Customer Concentration– While you might value your best customer, that same customer could be a red flag for a potential buyer. If a top customer accounts for more than 15-20% of your revenue, then now is the time to diversify with new clients and contracts. Keep in mind that high concentrations could potentially lower the valuation range for your company as the buyers may discount your earnings, and lenders may minimize their loans.
  • Supplier Concentration– If you are heavily dependent on just one main supplier, begin to pre-approve alternative suppliers to remove the dependency on a single entity.
  • Owner Dependency– Are you the only executive driving sales, finance, and/or operations? If so, consider training the next tier of management, give them greater responsibilities, and begin to move yourself away from the day-to-day operations.

A buyer wants to know that risk is mitigated as much as possible. Understanding and addressing these and other key business risks can greatly increase the amount a buyer will pay for your business.

3. Turn your weaknesses into value

Knowing what potential value detractors your business may have is central to devising a plan to turn them into value drivers. In addressing weaknesses and threats to your business, it will likely be necessary to make a few changes. These may be time consuming or costly in the short term, but will absolutely add value during the sale process.

One way to first identify some of the company’s weaknesses is through a “self-due diligence” process. Force yourself to critically evaluate each area of your business, be honest, and look at the company as a buyer would.

For example, we have seen manufacturing companies with above average labor costs reduce them significantly by investing in technology as part of preparing the company for sale. One building products manufacturer installed a new ERP system, resulting significant labor savings. A precision machining business adopted the use of robots, which boosted productivity and cut direct labor costs.  Each dollar saved improved EBITDA and resulted in higher prices and higher multiples.

A critical review of your company will allow you to “fix” weaknesses and improve valuation.

4. Prepare for the due diligence process

In the past, due diligence required mostly accounting, financial, and legal analysis. In today’s world, it has expanded to incorporate a broader scope of disciplines such as cyber security, e-commerce, and intellectual property review. If your business uses technology, has exposure to international markets or does not utilize disciplined accounting procedures, you may want to consider engaging an independent accounting firm to review your operations via a Quality of Earnings (QOE) analysis which can help you prepare for the scrutiny you will face in a sale process.

The sell-side QOE will ensure that the numbers your business is presenting are correct and that they will stand up to due diligence from the buyer. They may also uncover hidden EBITDA adjustments, one-time expenses, cost savings, or efficiencies that you didn’t realize existed. From the perspective of time, typical due diligence efforts extend three years into the past but may extend back further. By conducting a QOE upfront, you will be able to address many issues before going to market. This may take more time upfront, but you will also be more likely to negotiate a higher purchase price when you have buyers at the table.

5. Prepare your team of advisors

You are an expert on the ins and outs of your business, but chances are you have never sold a business. While a typical sale process can take 6-12 months to complete, meeting with advisors early on can help you by engaging with accounting firms or investment bankers earlier on, they can identify opportunities that will give you time to make specific changes that will increase value.

Be sure that your team of advisors possesses the relevant industry experience and that their strategic objectives are aligned with your own.

How well you prepare your business for sale will make all the difference in its perceived value in the marketplace. Prospective buyers look for very specific factors when developing their valuations of your company. If you begin your planning early and focus on these five areas, you will be in an excellent position to maximize the value of your business.

 

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How Coronavirus Is Impacting Lower Middle Market M&A Activity

By Meghan Daniels, Axial

Last week, Axial convened a virtual roundtable of members to review the impact of the coronavirus pandemic on lower middle market business owners, M&A activity, and dealmaking. We assembled specialist and generalist investment bankers, corporate buyers and private equity investors (eight in total) to cut across the LMM and understand reactions to the chaos of the past few weeks. What are PE buyers and sell-side bankers doing when it comes to deals under LOI? Are strategic buyers pausing M&A to handle operations? How is the virus impacting industries from healthcare to manufacturing to restaurants to e-commerce and more?

Here are the Axial member attendees. Thank you to each of them for joining on almost no notice and for sharing freely what they’re seeing and experiencing on the ground.

Start at minute 11 if you want to get into the meat of it (the video starts with a round of introductions by its attendees). Quick disclaimer: This conversation was recorded Wednesday, March 11, and plenty has arguably changed since then already; much of the substance here is still relevant.

If you don’t have time to watch, here are a few quick takeaways from the conversation:

  1. Deals under LOI are proceeding with maximum urgency or they’re on hold. We’re not seeing a lot of in between.
  2. For deals in earlier stages, there’s definitely a lot of anxiety on the part of sellers and a bit more caution on the part of buyers — there are some who are hitting the pause button to wait and see how the situation shakes out in a few months. But at the same time, buyers remain flush with capital, so there will be others who continue to engage actively on opportunities assuming the worst will be over in a few months (we’re seeing China ramp back up now). For sellers, the advice is to “get as far you can as fast as you can” and beyond that just keep doing what you’re doing and try to keep up operations to the extent possible. If this passes, bankers will be able to pro-forma the disruption.
  3. It’s inevitable that there will be supply chain issues for many companies, but these are fluid and highly variable depending on your business. Companies that rely on China may be in a better position at this point than those who rely on other countries in Europe or domestically as infections ramp up here.
  4. Supply chain disruption was less severe than anticipated, with speculation that the Trump tariff activity of 2018/2019 had already precipitated moves toward a more diverse supply chain among both scale and niche manufacturers.
  5. Telehealth, tele-education, e-commerce, and virtualized communication are immediate obvious investment themes, as is distressed special situation investing across energy, leisure, consumer, and other industries.

 

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Complete the “Value Builder” questionnaire today in just 13 minutes and we’ll send you a 27-page custom report assessing how well your business is positioned for selling. Take the test now:

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